A Bloomberg report states that the IRS is auditing Google on the Search Engine company’s strategies in cutting its tax bill by about $1 billion a year by channeling profit to subsidiaries situated in countries with low or non-existent tax rates.

These techniques are known in tax circles as the “Double Irish” and “Dutch Sandwich,” named so because it involves moving profits through subsidiaries in Ireland, the Netherlands, and Bermuda, according to the report on Bloomberg News. Apparently, over the last three years, these practices had saved Google $3.1 billion in taxes.

The strategy is simple. By funneling its profits out of the US where tax rates are high, a company is able to reduce its costs. In 2009, Google Bermuda collected about $6.1 billion in royalties from a separate Google subsidiary based in the Netherlands in order to enjoy the tax free environment in the Caribbean nation. On Thursday, Google reported an effective tax rate of about 19% for the third quarter, less than half the average combined US and state statutory rate of 39.2%.

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